The stock is telling us the market does not have confidence in AIG’s turnaround

Back in 2016, I was part of a team who conducted a survey of AIG’s shareholders on its view of managements’ performance and strategy.

The results were not good. According to our poll that was estimated to cover investors representing more than a third of AIG’s owners, only 4 percent supported management’s “status quo” strategy.

Perhaps it was not surprising that around a year later, CEO Peter Hancock was forced out, with his replacement Brian Duperreault precipitating a major strategic re-think for the firm.

Now I have to confess, I would love – love – to see the results of this survey were I able to repeat it today.

Alas, the closest I can get to this is simply to look at the stock. As legendary value investor Benjamin Graham famously said, in the short term, the market is a voting machine.

Investors may not be able to express their opinions every day through public surveys. But they sure can vote with their feet.

With this in mind, it was notable that the shares were down 9 percent yesterday to $40.19, just 11 percent above the 52-week low.

Since new management took over, the shares have underperformed the S&P 500 by 46 percent on a total return basis, with the valuation hovering around its lowest points since 2013 – a remarkable fact given the level of equity market recovery since then.

This does not scream a vote of confidence from Mr Market.

But let me be clear. Part of my curiosity is because I personally think there is much to like in what this management team is doing.

The sheer volume of Category-A talent attracted to the company to execute Duperreault’s vision is an impressive achievement on its own. As I have said previously, my view is that AIG finally has the “A-team” it needs to fix this long-struggling company.

And if you’re underwriting a turnaround as an external investor, the quality of the people in place doing the heavy lifting is by far and away the most important piece of due diligence you can do. I personally think this is a team you could get comfortable taking a bet on.

Additionally, as I wrote back in October, this management has clearly done an extraordinary amount of work in resetting the firm’s underwriting culture and standards. Though in insurance, earnings materially lag reality, I think it is highly likely you will see underwriting performance and earnings quality improve in 2019 and over the next several years.

So let me be clear. The reason I would love to poll the market right now is because I think it’s hard to really take too much umbrage with what management is doing – particularly it’s well thought out and well communicated pullback and withdrawal from parts of the market long synonymous with AIG.

For sure, I have one major quibble. My personal view of the company’s use of capital to fund expensive acquisitions to change the “narrative” and jam the accounting in the right direction has lower risk-adjusted returns than buying back stock at a steep discount to net assets.

But reasonable people can disagree about this, and I could be proven wrong in the long-term if the level of growth from these assets is significant. As with many things in life, much depends on the time horizon of your payback period.

One thing is sure though. The stock is telling us the market does not have confidence in AIG’s turnaround. There are no two ways around this.

So here is my question. Is this because investors do not have faith in this management team or strategy, or because they think that the company cannot be fixed in spite of an excellent management team?

My instinct is to think the latter. One is reminded of Warren Buffett’s famous dictum that “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

And yet, either way, I’m not entirely sure Mr Market is right to bet against AIG this time…

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The stock is telling us the market does not have confidence in AIG’s turnaround

Gavin Davis

15/02/2019

Back in 2016, I was part of a team who conducted a survey of AIG’s shareholders on its view of managements’ performance and strategy.

The results were not good. According to our poll that was estimated to cover investors representing more than a third of AIG’s owners, only 4 percent supported management’s “status quo” strategy.

Perhaps it was not surprising that around a year later, CEO Peter Hancock was forced out, with his replacement Brian Duperreault precipitating a major strategic re-think for the firm.

Now I have to confess, I would love – love – to see the results of this survey were I able to repeat it today.

Alas, the closest I can get to this is simply to look at the stock. As legendary value investor Benjamin Graham famously said, in the short term, the market is a voting machine.

Investors may not be able to express their opinions every day through public surveys. But they sure can vote with their feet.

With this in mind, it was notable that the shares were down 9 percent yesterday to $40.19, just 11 percent above the 52-week low.

Since new management took over, the shares have underperformed the S&P 500 by 46 percent on a total return basis, with the valuation hovering around its lowest points since 2013 – a remarkable fact given the level of equity market recovery since then.

This does not scream a vote of confidence from Mr Market.

But let me be clear. Part of my curiosity is because I personally think there is much to like in what this management team is doing.

The sheer volume of Category-A talent attracted to the company to execute Duperreault’s vision is an impressive achievement on its own. As I have said previously, my view is that AIG finally has the “A-team” it needs to fix this long-struggling company.

And if you’re underwriting a turnaround as an external investor, the quality of the people in place doing the heavy lifting is by far and away the most important piece of due diligence you can do. I personally think this is a team you could get comfortable taking a bet on.

Additionally, as I wrote back in October, this management has clearly done an extraordinary amount of work in resetting the firm’s underwriting culture and standards. Though in insurance, earnings materially lag reality, I think it is highly likely you will see underwriting performance and earnings quality improve in 2019 and over the next several years.

So let me be clear. The reason I would love to poll the market right now is because I think it’s hard to really take too much umbrage with what management is doing – particularly it’s well thought out and well communicated pullback and withdrawal from parts of the market long synonymous with AIG.

For sure, I have one major quibble. My personal view of the company’s use of capital to fund expensive acquisitions to change the “narrative” and jam the accounting in the right direction has lower risk-adjusted returns than buying back stock at a steep discount to net assets.

But reasonable people can disagree about this, and I could be proven wrong in the long-term if the level of growth from these assets is significant. As with many things in life, much depends on the time horizon of your payback period.

One thing is sure though. The stock is telling us the market does not have confidence in AIG’s turnaround. There are no two ways around this.

So here is my question. Is this because investors do not have faith in this management team or strategy, or because they think that the company cannot be fixed in spite of an excellent management team?

My instinct is to think the latter. One is reminded of Warren Buffett’s famous dictum that “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

And yet, either way, I’m not entirely sure Mr Market is right to bet against AIG this time…

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